Georgia Property & Casualty Practice Exam

What best defines a unilateral contract in insurance?

1. Both parties make mutual promises.

2. Only one party is bound to perform under the contract.

3. Either party can terminate the agreement without penalty.

4. The contract can be enforced by either party equally.

The correct answer is: Only one party is bound to perform under the contract.

A unilateral contract in insurance is characterized by the fact that only one party is bound to perform their obligations under the contract. In the context of an insurance policy, the insurer makes a promise to pay a certain amount in the event of a covered loss, while the insured has the option to pay the premium but is not required to file a claim or to continue coverage. This means that the insurance company has a legal obligation to fulfill its promise if the insured event occurs, but the insured has the discretion to decide whether or not to take advantage of that promise. This one-sided nature of the obligations defines the unilateral aspect of the contract. In contrast, mutual contracts involve promises and obligations from both parties, which is not the case here. The idea that either party can terminate the agreement without penalty or that the contract can be enforced equally by both parties does not apply to unilateral contracts, where the burden of performance falls solely on one party (the insurer). Therefore, the definition of a unilateral contract in insurance clearly aligns with the statement regarding only one party being bound to perform.